DOL Fiduciary Rule Helps UBS Rein In Recruiting Costs
Whether or not the Trump administration stalls, modifies or eliminates the Department of Labor’s “conflict-of-interest” rule, UBS AG has already cut recruiting expenses at its high-cost U.S. brokerage industry as a result of the rule.
“The one positive that has come out of the DOL ruling is the exclusion of the ability to pay for brokerage accounts,” UBS Chief Financial Officer Kirt Gardner said on the Swiss banking giant’s fourth-quarter earnings call on Friday.
UBS Financial Services, the broker-dealer that the bank markets as UBS Wealth Management Americas, is sitting on more than $3 billion of recruiting bonuses made in the form of forgivable loans over the last decade or so. The U.S. unit’s new boss, former UBS AG CFO Tom Naratil, vowed in June to reduce recruiting as part of the parent bank’s broad cost-cutting campaign.
He has been helped by the DOL rule that is scheduled to become effective on April 10.
The Department of Labor rule prohibits firms from offering “forgivable loans” and other hiring incentives tied to hitting future revenue and client-asset transfer targets on retirement accounts. Many firms object to the rule because it effectively limits brokers’ ability to offer brokerage, or commission-based, retirement accounts and permits class-action lawsuits, but executives have embraced its effect on driving down recruiting bonuses.
Gardner’s comments, the first to publicly address the issue, comes as Naratil’s campaign to cut recruiting has taken hold. UBS Wealth Management Americas’ broker headcount as of yearend 2016 had fallen 2% to 7,025 from 7,140 a year earlier and from more than 8,000 a decade ago.
The recruiting bonus overhang from the go-go years is slowly slimming, according to data UBS released on Friday. Its $3.03 billion of loans to financial advisors at yearend 2016 was down 5% from $3.18 billion a year earlier.
The Americas wealth unit posted $358 million of pre-tax profit in the fourth quarter, up 21% from an adjusted $296 million in the year-ago quarter but down from $367 million in the 2016 third quarter. Revenue in the fourth quarter rose 7.3% from a year earlier to $2.04 billion while operating expenses fell 6.5% to $1.69 billion.
UBS’s fourth-quarter report highlighted the productivity of its advisor force. Its average broker’s $1.16 million of annualized production bested the $1.01 million that Morgan Stanley reported for its almost 16,000 brokers earlier this month and the $960,000 produced by Merrill Lynch’s more than 14,500 brokers.
Judged by a different metric valued by retail brokerage executives, “net new money” attracted from new and existing clients, UBS fared less well. Its U.S. broker-dealer suffered outflows of $1.3 billion from client accounts, a negative 0.5% annualized growth rate in new money that contrasted with a 6.8% gain in the fourth quarter of 2015.
“Net inflows from financial advisors employed with UBS for more than one year were more than offset by net outflows from net recruiting,” the company explained in a slide accompanying its earnings. The decline was well below the bank’s target of growing client assets at the Americas unit by 2% to 4% annually.
Client’s total invested assets of $1.1 trillion were virtually unchanged from the previous quarter, despite better market performance, the firm said.
Sergio Ermotti, group chief executive officer of the Swiss banking giant, was nevertheless upbeat about the U.S. unit’s strategy of pulling back on recruiting and incentivizing them for for longevity with the firm and for increasing their sales of mortgages and securities-backed credit lines to their wealthy customers.
“We continue to believe that continuity and retention of our current staff is the better way forward,” he said. “Our focus in the business is to expand our banking products and also capture any potential way to gain market share.”
Net interest income at Wealth Management Americas soared 24% to $405 million from $326 million in the fourth quarter of 2015 as loans and credit lines rose to $51.6 billion from $48.7 billion at the end of 2015.
Gardner, for his part, could not resist gloating about the way the firm’s ‘wait-and-see’ approach to announcing policy changes regarding the fiduciary standard contrasts with competitors such as Merrill Lynch and JP Morgan, which have instructed brokers to terminate commission-based retirement accounts.
“There is some indication that [the DOL Rule] will, at a minimum, be delayed and potentially not be implemented at all,” Gardner said. “And because we delayed our announcement…that’s proved to be very effective given some of the commitments that our competitors have made.”
Raymond James Financial CEO Paul Reilly made similar comments on Thursday.